An ability to identify prevailing trends on a Forex graph is crucially important for a trader because it is exactly trends that create opportunities for lucrative profits. We will focus on 2 types of price tendencies in the Forex space – the bullish and bearish trends.
But first, let’s clarify what a trend in the Forex market is.
Simply speaking, a trend is a price behavior of a specific financial instrument (asset), the main price movement, which involves an overall price decline or rise for a given timeframe. Trends reflect where the market will move in the near future. Prices in the market never move chaotically or by inertia, but obey certain laws.
When performing a technical analysis, traders generally try to distinguish bullish and bearish tendencies on the Forex chart because knowing where prices are going and which side of the market is stronger, helps traders and investors to multiply winnings on binary options.
Buyers at the Forex market are called bulls – those who open positions for purchase. Prices rise when the market has more buyers than sellers as if a bull is pushing the price up with its horns.
Bears in the Forex slang are sellers – those who open positions for sale. The price drops when there are more sellers at the market than buyers. It seems that the bear beats the price with its paws and makes the chart move downwards.
What do bullish and bearish trends mean?
A bullish trend in the technical analysis reflects the price boost during a particular timeframe. On the Forex chart, a bullish trend looks like a number of price tops, each of which is higher than the previous. In such a case, the tendency line during a bullish movement connects the price bottoms on the Forex graph. Consequently, the bullish trend line serves as a level of support.
How to detect a bullish trend at the Forex chart?
- Determine when the price actually started going up.
- On the graph, find a place in which the asset had the lowest rate before growing up (the point A, the lower candle tail).
- Then find the point B – the lower candle tail after which the asset became to increase in value.
- Link points A and B and continue the line. Its right end is pointed upwards. It is the support level.
In other words, to detect an up-trend on the Forex chart, it is necessary to craft a line through successively increasing price minimums.
A bearish trend depicts the period when an asset was losing its value (a declining tendency). According to the market law, prices go down when there are too many sellers and a lack of buyers. On the Forex price chart, a bearish trend looks like a series of price bottoms, each of which is lower than the previous. When the market is decreasing, on the Forex graph, the trend line connects the swing tops producing a resistance level for the price.
How to find a bearish trend on the Forex chart?
- Determine when the price actually started going down.
- Find the place on the chart when the currency pair (asset) had the maximum rate before declining. Mark it as the point A (the highest candle tail).
- Then detect the point B – the highest candle tail after which the asset started depreciating.
- Connect the A and B points and continue the line. Its right end is pointed downwards. This is a resistance level.
In other words, to detect a down-trend on the Forex chart, it is necessary to draw a line through successively decreasing price maximums.
Why do trends matter?
As we found out, bullish and bearish trends on the Forex graph show the direction of the price dynamics. A trader will hardly gain solid profits without knowing how to distinguish and build such trend lines on the price chart. Trends help to:
- Develop own trading strategies;
- Better understand The Dow Theory of Trends – the foundation layer of the technical analysis;
- Use technical indicators more effectively.